Al Baraka-World Bank in key research partnership

Manama, August 6, 2014

Bahrain-based Al Baraka Banking Group (ABG) is collaborating with the World Bank for research into risk management and enabling environment in Islamic finance.

The partnership's first initiative, part of a planned series of research projects, will be a study examining the risk-management challenges facing Islamic banks, with a particular focus on "musharaka" and "mudaraba" under the profit-and-loss-sharing system, said a report in the Gulf Daily News (GDN), our sister publication.

"Musharaka", meaning partnership, is a mode of finance in which capital is provided by two or more parties for project development.

"Mudaraba" is a partnership where capital is provided, in cash or assets (no debt is accepted) by one party - the fund provider - and labour is provided by the other party.

ABG president and chief executive Adnan Ahmed Yousif said the collaboration was yet another demonstration of the group's commitment to research and knowledge-building in the Islamic financial services industry.

"Al Baraka is recognised as a pioneer in the Islamic banking sector for its longstanding think-tank, Al Baraka's Annual Islamic Banking Symposium (The Nadwa).

"The Nadwa is the only platform of its kind that annually provides the industry with resolutions and fatwas, which form the basis of new products, standards and policies," Yousif added.

According to World Bank's Islamic Finance head Abayomi Alawode, the most pressing challenge facing the Islamic finance industry today is to prepare the ground for the profit-and-loss system to flourish.

"After a series of discussions with Al Baraka's executive management and research team, we recognise that the industry must address concerns that the majority of Islamic banking assets are debt-based and that the proportion of equity based investments (such as musharaka and mudaraba) does not form a significant portion of the Islamic investments portfolio," Alawode added.

The enabling support system to mitigate these inherent risks and challenges is either limited or non-existent, he said.

The World Bank official said by collaborating with Islamic financial institutions, such as Al Baraka, the institution hoped to draw on their front-line experience in the use of Islamic financial products.

"The insights will contribute to producing a study that will encourage innovation and contribute to the sustainable growth of the industry," he said.

"The Islamic banking and financial industry has reached a level where further growth is possible, if it develops new tools and innovative products that address those core issues," Alawode added.

Yousif said the research project, being the first of its kind, would not only collect data from a number of countries where musharaka and mudaraba are being used in banking transactions, but also examine what enabling legal and regulatory environment would be needed to support adequate risk management.

The project is now under way and the preliminary findings are expected to be available next year. - TradeArabia News Service